Business Directories

After decades, Saudi may boost natural gas price

Al Khobar, December 20, 2012

By Amena Bakr and Reem Shamseddine

Saudi Arabia may as early as next year do something it has resisted for decades: raise what is currently the world's lowest price for natural gas, in order to reduce expensive subsidies and curb energy waste.

A price hike would be an important economic shift for the country but a difficult one, since it would risk hurting the competitiveness of industries such as petrochemicals.

Energy-hungry industries have boomed in Saudi Arabia over the last decade, thanks largely to the cheap gas, priced for domestic industrial users at just $0.75 per million British thermal units (mmbtu) - a small fraction of prices paid by competitors around the globe.

The Saudi price, unchanged for decades, was set when gas was a plentiful by-product of the country's giant oil fields.

Since then, Riyadh has shied away from raising the price, despite escalating production costs, for fear of hurting companies which provide jobs for a young and growing population.

But sources of gas that can be tapped cheaply have now run low, a shortage intensified by waste. So Saudi Arabia is increasingly having to look at costly offshore or unconventional sources of gas to meet soaring demand.

The government has had some success reducing waste by demanding that petrochemical projects, which use natural gas as a raw material, introduce more efficient technologies before allocating them any gas.

Raising the domestic selling price could do more to discourage waste, while saving the government billions of dollars in gas subsidies.

"There are plans to increase the gas price, and this will happen because Saudi Arabia wants to eliminate inefficient use of gas, because it's running out," said a Saudi industry source familiar with government discussions on the issue.

The source, who declined to be named because of the sensitivity of the subject, said a decision on concrete action had not yet been made, but that a price hike might occur by the end of 2013.

Top government officials have declined to comment publicly on the issue. But over the past year, Saudi Arabia has shown increasing willingness to grapple with economic reforms, introducing a law covering home mortgage lending, for example.

Reform of gas pricing may follow as soon as next year, many industry participants and analysts believe.

Kamel Al-Harami, an independent Kuwaiti oil analyst, said that after years of debate among government officials, the gas price might be lifted next year - but that any hike would be small and calculated to avoid harming the petrochemical sector.

SUBSIDIES

Saudi Arabia keeps its domestic gas selling price down with huge government subsidies paid out of the hundreds of billions of dollars which the kingdom makes from exporting crude oil.

The subsidies have drawn complaints to the World Trade Organisation (WTO) by China and India, whose own petrochemical companies compete with Saudi firms.

But the Saudi petrochemical industry has gained great political weight because it generates thousands of jobs in a country whose leaders are keen to avoid the kind of youth unrest that fueled the region's Arab Spring uprisings of 2011.

So the government has so far resisted outside pressure to cut the subsidies, arguing that since none of the gas is exported, it is not breaking WTO trade rules.

Some Saudi petrochemical executives have warned higher gas prices would make them less competitive in the global market. They point out that Chinese competitors pay lower wages to their workers, while North American rivals are starting to benefit from low energy prices thanks to the proliferation of shale gas.

"The decision on the Saudi gas price is now even more important in light of the US shale gas revolution," said Aman Amanpour, an independent petrochemicals and energy consultant.

The price of gas for US industrial users tumbled from highs of around $13 per mmbtu in 2008 to a record low of about $3 per mmbtu in April 2012, according to the US Energy Information Administration (EIA).

The US price has rebounded somewhat since then, however, with the EIA expecting industrial consumers next year to pay well over $4 per mmbtu and often more than $5.

So Riyadh could double or triple its gas price for Saudi industrial consumers without coming close to the prices faced by US competitors.

Also, analysts expect US gas exports to rise over the next few years, which would keep upward pressure on US domestic prices and therefore help safeguard the big price advantage enjoyed by Saudi firms.

MODEST INCREASE

The result of such calculations, industry participants and analysts believe, may be that Saudi Arabia raises its domestic gas selling price to around $1.50 per mmbtu - a level high enough to make firms think harder about conserving gas, but not so high as to make a big dent in their earnings.

"The increase in price will not eat too much into the profitability of petchem companies, because right now the price is very, very low," said the Saudi industry source.

"I don't necessarily think that the Middle Eastern producers will be less competitive," said David Seaton, chief executive of US engineering firm Fluor Corp, which is active in Saudi Arabia's downstream petrochemical sector.

Yet a natural gas selling price of $1.50 per mmbtu might still not be high enough to resolve Saudi Arabia's looming supply problems.

State-owned oil and gas monopoly Saudi Aramco has the fourth largest conventional gas reserves in the world and aims to increase its production from 10.2 billion cubic feet per day (bcfd) in 2010 to over 15 bcfd by 2015.

But with most of its easily exploited gas deposits associated with oil fields already developed, Aramco is being forced to map out its "unconventional" gas reserves, such as those trapped in heavy formations of rock and sand, which will be much more expensive to exploit.

If the domestic selling price remains far lower than global levels, there will be scant incentive for foreign companies to explore for gas in the vast deserts of the Arabian Peninsula, leaving the Saudi state to foot the bill.

"In order to enhance the growth of petrochemicals in Saudi Arabia you need two things: you need innovation, and you need more searching for future gas," said Mohamed al-Mady, chief executive of the country's largest petrochemical producer, Saudi Basic Industries Corp. - Reuters